ACCOUNTANT EXPLAINS: Should You Buy, Lease or Finance a New Car

the question of whether you should buy a finance  or lease a car is surprisingly controversial on   one side you're making that buying a car is  the best option because it means you get full   ownership of the car and it works out cheaper in  the long run but on the other side you may think   that leasing is a good idea because it means  you pay far less on a monthly basis and you   get to drive around a brand new car after doing  a thorough analysis and running the numbers on   all the various options I was pretty surprised  at what I found and the difference in savings   between going for what a car dealership tries to  sell you and what is actually the cheapest option   so in this video we're going to cover four of the  main ways to purchase the car what they are which   one's the cheapest and finally the psychological  factors to take into consideration this is part   of a series of accountant explains videos where we  discuss all things personal finance and Building   Wealth part one what are the main options the  first way to purchase a car is just by buying   it outright pay the full price of the car on day  one and you don't have to worry about any payments   or interest going forward pretty straightforward  the second way to buy a car is through finance and   in the UK this is often referred to as higher  purchase and it works in a similar way to a   personal loan so you pay a deposit towards the  car you borrow the outstanding amount at a set   interest rate for an agreed period let's say  three years and then over the three years you   make monthly repayments and then at the end of  that period you own the car the Third Way is to   release which is essentially like renting you make  monthly payments to use the car and at the end   of the contract you give the car back the monthly  payments here are calculated slightly differently   than in the finance option in the finance higher  purchase option you are paying off the full value   of the car because you're going to own the car at  the end in the lease option you are only repaying   part of the car and that's the part that the car  depreciates during the time you have it for you   then divide that amount into monthly payments and  add some fees on top the fourth option is PCP and   for this you set a term for the agreement you pay  a deposit and then the company provides a final   value for their car and what it will be worth at  the end of the agreement these are then subtracted   from the cost of the car to work out how much the  loan will be and how much you'll be paying on a   monthly basis at the end of the contract you have  a few options for the PCP you can decide whether   you want to keep the car and pay that final value  you can choose whether you want to return the car   or you can use that final value to part exchange  the car now we've covered the foundations let's   go into the financial implications and the cost  of each of these so to compare apples with apples   I've done this analysis using an average  medium-sized family car so that is the Audi   of these options I'm using a 15 deposit so 4500  pounds and a three year term to make it as like   for like as possible the first financing option  we discussed is the higher purchase so I put down   a deposit the interest rate I was quoted was  just under 11 which brings my monthly payments   for a three-year term to 810 pounds a month that  means the total price I pay for the car at the end   of the contract is just under 34 000 and at this  point I now have full ownership of the car let's   assume now I want to sell the car I'm going to say  looking at comparables on the market I can get 16   000 pounds per eye online on the second hand  car market this car three years old is going   for a fair bit higher than this twenty thousand  pounds plus but I don't think this is an accurate   representation of what we can get for the car in  three years time because secondhand car prices are   going through the roof at the moment and I don't  believe this will continue for the next three   years I think this bubble will burst before then  so if I were to sell the car for that much then   it would have essentially cost me around 17 500 to  have the car for three years the next way we spoke   about is buying a car through a lease in the lease  option assuming I put down the same deposit the   monthly payments are 345 pounds a month far lower  than the finance higher purchase option because of   the way we say it's calculated only on a portion  of the car and it's no interest so in this case to   have the car for three years it would have cost  me around 17 000 pounds sometimes you have the   option to buy that car at the end of the term but  this isn't guaranteed and you won't know how much   the dealership is actually going to give you for  that car until the last few months of the lease   term unlike the next option which is the PCP this  is the most popular one the one that most people   take up and one of the reasons for this is because  the car dealership pushes you to take this one on   because it is also the most lucrative for the them  but it definitely may not be the best option for   you if you are just looking at it in terms of  a total cost perspective let's run through the   numbers putting down the same deposit the value  they said this car will be worth in 3s time is 15   000 So based on my deposit the pre-agreed  car value of 15 000 and interest rate again   of just under 11 my monthly payment would be 453  pounds if at the end of the contract I decide to   return the car then to have that car for three  years it would have cost me approximately 21   000 and if I were at that point to instead choose  to keep the car and pay the final balance of 15   000 it would have cost me 36 000 pounds the total  cost of the car from those numbers on this car you   can see if I went for the PCP option at the end  of the contract if I returned the car then I would   have been better off just going with the leasing  option it would have saved me four thousand pounds   nearly the car dealership tries to sell you the  PCP because it is the most lucrative for them they   make the most money from it because it encourages  you to stay with them and when the contract ends   to upgrade your car and part exchange it so they  keep making money from you they would also try and   tweak the numbers using dealer contributions or  changing the deposit slightly to try and encourage   you to go for the PCP option in some cases it  may well be the best option for you it may work   out better because you're getting a car that holds  its value and you or you want more flexibility but   it's also important to do the calculation looking  at the total cost of the car as a whole and just   to further drive this point home no pun intended  if I decide to keep the car at the end of the   contract I would have been better going for the  higher purchase option that would have also saved   me money the other option which we spoke about  is buying the car outright for thirty thousand   if we did this and assuming we could sell it at  16 000 that price in the second hand market then   this would be the cheapest option at 14 000 to  have the car for three years however an important   something to consider here is the opportunity  cost if you put 30 000 in day one it's locked   up in the car the alternative is if you have  thirty thousand and you paid the four thousand   five hundred deposit and then you have the left  over to invest in something like the S P 500 or   another cash generating asset the question here  is can you make a better return on that versus   the additional cost of a financing option other  factors to consider are the psychological factors   if you are someone who tends to keep your cars for  a long time then going down the higher purchase   route means you can pay your car off and then you  won't have the stress of having to keep up with   your monthly payments and you have full ownership  of the car which means you can do what you want   to it you could drive it as far as you want but  at the same time any maintenance costs do fall on   you and this cost tends to rack up the longer  you have a car for on the flip side going for   the lease or the PCP option means you can go for a  newer car with lower monthly payments and you can   keep changing your car more regularly whilst not  worrying about whether you'll be able to sell the   car in the future and for how much you also in  this case don't have to worry about the ongoing   maintenance if you keep trading in the cars before  the warranty runs out which is usually around the   three year mark however you do need to keep the  car in pristine condition otherwise you'll get   charged a bump for it when you return it and there  are restrictions also when it comes to the PCP or   lease so that includes the changes you can make  to the car and also the number of miles you do on   it if you go over that mile restriction then you  will incur an additional cost per mile if you do   have the money to buy a car outright then this in  my opinion is a solid option where you don't have   the stress of any monthly payments if you were to  go down this option unless you really know when it   comes to cars and you can flip it on for a profit  then instead buying a pre-owned car that's two to   three years old and has already depreciated  substantially at someone else's expense might   well be the best option so hopefully this video  gave you some ideas on things to consider and how   to run the numbers for yourself and which route  you want to go down this analysis has been done   on the basis that you are buying a car as an  individual rather than as a company or through   a business if you've got value from this video  please do share it the importance of financial   education and financial literacy is so important  I'd also love to know how you've bought your car   how you bought the one that you currently  drive if you do have a car or how you're   thinking about purchasing your next car thank  you for watching and see you in my next video

Channel: Nischa

Views: 3,670,338

Keywords: buying a car, car buying tips, how to buy a car, finance vs lease, pcp, pcp finance explained, how to save when buying a car, car buying, accountant explains, nischa, leasing explained, finance explained, uk finance, car finance, car leasing explained, lease vs finance

Id: Df0vq2jz5Ws

Length: 9min 27sec (567 seconds)

Published: Sun Feb 19 2023